A slowing economy is likely to be a bigger problem for stocks than blazing hot inflation and a hawkish Federal Reserve, according to one of Wall Street’s biggest bears.

Morgan Stanley strategist and chief investment officer Michael J. Wilson predicted the S&P 500 will fall at least 13 percent more in the fourth quarter. In a note to clients, he reaffirmed a “fire and ice” vision of the stock market after the Federal Reserve said it must keep raising interest rates to get inflation under control.

Wilson lowered his expectations for growth of earnings per share (EPS) in 2022, and predicted in a Sept. 6 research note that earnings will fall 3 percent in 2023, even if there isn’t a recession.

“We do not think the bear market is over if our earnings forecasts are correct,” Wilson wrote.

Wilson said he expects lows for this bear market will likely arrive in the fourth quarter. He sees the S&P 500 falling at least 13 percent more in the fourth quarter to at least 3,400 points and to as low as 3,000 if a recession arrives.

Wilson has had a “fire and Ice” vision of the stock market all year, arguing that stocks are fighting a toxic combination of economic headwinds that will keep equity prices down until late 2023, Fortune reported.

The stock market’s summer rally ended in August when the Fed pivoted more sharply than most expected, reaffirming a hawkish inflation-fighting stance. Despite a 9 percent drop in the S&P 500 since mid-August, Wilson says buyers should still beware.

Wilson used the term “fire” in the research note to describe Fed tightening in response to historically high inflation (hot) and “ice” to describe disappointing economic growth.

“Fed tightening in response to historically high inflation, the fire, has weighed heavily on valuations for all asset markets,” Wilson wrote. “Meanwhile, growth has also disappointed…the Ice. While this combination proved challenging for most stocks, we think Part 2 will turn out to be more icy than fiery as slowing
growth becomes the bigger concern for stocks, rather than inflation and the Fed.”

Wilson said he believes the stock market will experience “fire and ice, Part 2” in the coming months after Federal Reserve Chairman Jerome Powell warned that the Fed must keep raising interest rates to get inflation under control. The economy should brace for pain, Powell warned.

Economists noted that asset prices, including stock prices, must fall to achieve that goal, Fortune reported. The S&P 500 dropped more than 5 percent in the days after Powell’s comments. That was just the beginning, Wilson said.